Goldman Sachs equity derivatives analysts Krag “Buzz” Gregory speaking on “Today’s Volatility Environment” at the 28th Annual Risk Management Conference said that, following a volatility spike such as in 2008 and August-October, 2011, there are four stages of volatility stabilization.
“The first stage is when realized volatility trends lower as the economic outlook improves.
Second, the implied volatility of shorter-dated options follows realized volatility lower.
In the third stage, the term structure of volatility becomes steeply upward sloping as front-month implied volatility levels are low while back-month levels remain high.
Finally, in stage four, the back end of the volatility curve gradually moves down to come in line with realized volatility. It appears that we are in stage three right now with front month VIX futures coming down and back-month VIX futures remaining at substantially higher levels.”